Insurers facing stormy weather

DEVASTATION from Hurricane Michael in Mexico Beach, Florida, this month. The tropical weather that turned into Michael began as a relatively humble storm before turning into the most powerful cyclone to hit the Florida Panhandle, causing widespread destruction. AP

Extreme weather events, which are increasing in frequency and severity around the world, cause massive physical destruction. But it’s not only the physical losses that insurers must deal with; it’s indirect risks such as supply-chain interruption and professional liability.

At the recent Norton Rose Fulbright Insurance Conference, the firm’s London-based insurance law consultant, Tim Ingham, looked at the concerns, but also opportunities, for insurers in the face of climate change.

No presentation on extreme weather events around the world can be completely up to date because of the frequency with which they are now occurring. In the couple of weeks since Ingham’s presentation, there has been the widespread devastation in Florida wreaked by Hurricane Michael, which generated winds of 250km/* and which entered the record books as the third worst hurricane ever to make landfall in the US.

Ingham did, however, catalogue a string of events, including the recent severe wildfires in California, fuelled by strong winds, drought and high temperatures; drought and wildfires in Australia; weather of both extremes (cold and hot) in the UK and Europe; and, closer to home, the recent drought in the Western Cape.

And it’s likely to get a lot worse, according to scientists’ predictions, Ingham says.

Increases in global surface temperatures mean that more water vapour is held in the air. The increase is exponential. Increases in water vapour, will fuel more storms. For example, if global temperatures were to rise by as much as four degrees (twice the two-degree cap aimed at in the Paris Agreement of 2015), this will result in a 50% increase in the amount of water vapour in the air.

“Dry places are expected to get drier and wet places wetter,” he says, “sea levels will rise, and there’ll be more flooding from storm surges.”

Already, oceans are 20cm higher than they were in 1950, and there has been a fourfold increase in flooding claims at Lloyd’s in 30 years.

It remains to be seen whether insurance models, which work out the probabilities of weather-related losses occurring, will be able to keep up, Ingham says. “The industry has been pretty good in the past with modelling, and models have had to be adaptable, but how reliable will future modelling be if the weather becomes increasingly unpredictable and volatile?”

There may also be problems for regulators in setting adequate capital requirements for insurers, Ingham says, and for re-insurers, to which individual insurance companies transfer their larger risks.

But apart from the burden of covering heavier physical losses, insurers must be mindful of the indirect consequences of climate change, which are less obvious but can result in major financial loss. There may even be opportunities to be had in designing products to cover some of these risks, he says.

One is business and supply-chain interruption: extreme events can put businesses such as factories out of action for long periods, resulting not only in a loss of income for the factory owners, but an interruption in the supply of goods to their buyers.

Each stage of the supply chain, which may stretch all around the world, would be adversely affected.

Another is professional liability. Professional consultants take out indemnity cover to protect themselves from costly lawsuits brought against them for negligence. Professionals involved in the design and construction of buildings and infrastructure, such as architects, town planners and civil engineers, may be particularly at risk if they fail to adapt to climate change or to extreme weather in the design and construction of buildings.

Ingham cited the Glasgow Science Museum, where the extreme temperatures of this past summer melted the bonding compound between its roof panels.

At a climate-change seminar hosted in August by Norton Rose Fulbright, one of its directors, Michael Chronis, pointed out that engineers may have to look at how they design roads and other infrastructure in light of extreme weather event statistics. And Simon Robinson, head of specialist property at Bryte Insurance, said insurers may ask clients to retro-fit buildings to withstand more extreme storms or, in the case of forests, to ensure basic fire prevention systems are in place.

Then there are the companies that are contributing to climate change. Will legislation be introduced that makes it easier for third parties to claim compensation from them?

Ingham said one report he had read suggested that 80% of harmful emissions can be attributed to just 29 power companies around the world.

He said that many kinds of companies will face increasingly onerous obligations to report on risks relating to climate change. Also, where investors are sought, care will be needed concerning what information is provided relating to the risk that carbon dioxide emissions and climate change bring to that business or investment. Law suits could easily follow.